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Controls Need to Be Strengthened Over the

Internal Revenue Service’s Taxable Travel


Reporting

June 2002

Reference Number: 2002-10-107

This report has cleared the Treasury Inspector General for Tax Administration disclosure
review process and information determined to be restricted from public release has been
redacted from this document.
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

June 19, 2002

MEMORANDUM FOR CHIEF FINANCIAL OFFICER

FROM: Pamela J. Gardiner


Deputy Inspector General for Audit

SUBJECT: Final Audit Report – Controls Need to Be Strengthened Over the


Internal Revenue Service’s Taxable Travel Reporting
(Audit # 200110027)

This report presents the results of our review of the Internal Revenue Service’s (IRS)
taxable travel reporting. The overall objective of this review was to determine whether
the IRS had developed and implemented effective procedures and system corrections
necessary to address long-term taxable travel reporting requirements. This audit was
performed at the request of the IRS to evaluate the final procedures and system
corrections that the Chief Financial Officer (CFO) developed to address the long-term
taxable travel issue on the Travel Reimbursement Accounting System (TRAS).
In summary, we found that the IRS has taken positive steps to implement processes to
address the reporting requirements of long-term taxable travel transactions. Further,
our tests of a judgmentally selected sample of travel transactions and adjustments
showed that Federal, Medicare, and Federal Insurance Contribution Act (FICA) taxes
were accurately calculated. However, we identified deficiencies in manually recording
long-term taxable travel transactions, withholding state income taxes on adjustment
entries, requiring supervisory approval for adjustment entries, and accurately classifying
travel vouchers.
Management’s Response: IRS management agreed with three of the recommendations
contained in the report. They are in the process of evaluating a fourth recommendation
and will make a decision before the end of this fiscal year on whether they will change
current policy. Corrective actions taken or to be taken include updating the TRAS to
perform the long-term taxable travel withholding process, including systemic controls to
ensure the computations and amounts are correct; providing oral direction to reject
requests for long-term taxable travel adjustments that do not reflect supervisory
approval; issuing policies and procedures for long-term taxable travel and making them
available on the CFO travel and relocation website; and issuing a memorandum to all
2

Heads of Office re-emphasizing the policies and procedures associated with the
classification of long-term taxable travel situations. Management’s complete response
to the draft report is included as Appendix IV.
Copies of this report are also being sent to the IRS managers who are affected by the
report recommendations. Please contact me at (202) 622-6510 if you have questions or
Daniel R. Devlin, Assistant Inspector General for Audit (Headquarter Operations and
Exempt Organization Programs), at (202) 622-8500.
Controls Need to Be Strengthened Over the Internal Revenue Service’s Taxable Travel
Reporting

Table of Contents

Background ............................................................................................... Page 1


Positive Steps Have Been Taken to Implement Processes
Addressing Long-Term Taxable Travel Recording .................................... Page 2
Federal Income, Medicare, and Federal Insurance Contribution
Act Taxes Were Accurately Calculated ..................................................... Page 2
Deficiencies in Manually Recording Taxable Travel
Transactions .............................................................................................. Page 3
Recommendation 1: ....................................................................... Page 4

No State Income Taxes Withheld on Adjusting Entries ............................. Page 4


Recommendation 2: ....................................................................... Page 5

No Supervisory Approval for Adjusting Entries .......................................... Page 5


Recommendation 3 ......................................................................... Page 5

Misclassification of Travel Vouchers.......................................................... Page 6


Recommendation 4: ........................................................................ Page 6

Appendix I – Detailed Objective, Scope, and Methodology ....................... Page 8


Appendix II – Major Contributors to This Report........................................ Page 11
Appendix III – Report Distribution List ....................................................... Page 12
Appendix IV – Management’s Response to the Draft Report .................... Page 13
Controls Need to Be Strengthened Over the Internal Revenue Service’s Taxable Travel
Reporting
When Internal Revenue Service (IRS) employees incur and
Background are reimbursed for long-term travel to temporary duty
locations, the reimbursement, when meeting certain criteria,
must be included as ordinary income and is taxable. Long-
term taxable travel is typically described as either:
 Travel away from the employee’s home for more
than one year or for which there is a reasonable
expectation that such travel will last for more than
one year;1 or
 Daily travel between the employee’s residence and
a work location that is for more than one year or for
which there is a reasonable expectation that such
travel will last for more than one year.2
When a long-term travel situation is identified, a Form
12654, Authorization for Long-Term Taxable Travel should
be prepared by the employee and approved by the
employee’s supervisor. The taxable situation results in the
IRS withholding appropriate taxes from the employee’s
travel reimbursement.
The IRS pays an Income Tax Reimbursement Allowance
(ITRA) to employees incurring an additional income tax
liability as a result of long-term travel reimbursements. The
ITRA is designed to reimburse employees for Federal, state,
and local income taxes. It does not reimburse employees for
Federal Insurance Contribution Act (FICA)3 or Medicare
taxes. The ITRA is authorized by the General Services
Administration in the Federal Travel Regulations.
This audit was performed at the request of the IRS to
evaluate the final procedures and system corrections that the
Chief Financial Officer (CFO) developed to address the
long-term taxable travel issue on the Travel Reimbursement
Accounting System (TRAS).
Our review was conducted at the IRS’ National
Headquarters in Washington DC; the Administrative

1
Revenue Ruling #93-86 26 CFR 1.162-2; Travel Expenses.
2
Revenue Ruling #99-7 CFR 1.162-2; Travel Expenses.
3
FICA taxes are only withheld for employees that are covered by the
Federal Employee Retirement System.
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Accounting Division in Bethesda, MD; and, the Beckley
Finance Center (BFC) in Beckley, WV during the period
May through October 2001. The audit was conducted in
accordance with Government Auditing Standards. Detailed
information on our audit objectives, scope, and
methodology is presented in Appendix I. Major
contributors to the report are listed in Appendix II.
The IRS has issued various memoranda and alerts
Positive Steps Have Been Taken
announcing the long-term taxable travel rules.
to Implement Processes
Implementation and processing personnel were generally
Addressing Long-Term Taxable
aware of long-term taxable travel requirements. The IRS
Travel Recording has also updated its TRAS to identify long-term taxable
travel vouchers for manual withholding purposes.
Employees generally prepare and submit travel vouchers
through the IRS’ TRAS. After approval by the employee’s
supervisor, the travel voucher is up-loaded to the IRS’
Automated Financial System (AFS) for processing. Long-
term taxable travel reimbursements are automatically
suspended by the AFS for manual calculation of taxes to be
withheld. Amounts are withheld for Federal and state
income, Medicare, and FICA taxes. The IRS’ BFC
performs these manual withholding calculations. The
calculated amounts are netted from the employee’s travel
cost reimbursement prior to disbursement. In addition, the
BFC also processes adjustments that are necessary to correct
prior withholding or non-withholding of taxes.
During calendar year (CY) 2000, the IRS withheld in excess
of $1 million in Federal income taxes, $107,000 in state
income taxes, $74,000 in FICA taxes, and $54,000 in
Medicare taxes associated with long-term taxable travel
reimbursements for 1,702 IRS employees.
Our review of judgmentally selected samples4 of employee
Federal Income, Medicare, and long-term taxable travel vouchers processed during
Federal Insurance Contribution CY 2000 showed that Federal income, Medicare, and FICA
Act Taxes Were Accurately taxes were accurately calculated. The sample included
Calculated 215 travel vouchers with taxable income of approximately
$522,600. These vouchers showed approximately $146,300

4
See Appendix I for a description of the various samples and
population.
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($522,600 at the rate of 28 percent) in Federal income taxes
withheld, $7,000 ($113,000 at the rate of 6.2 percent) in
FICA taxes withheld, and $7,600 ($522,600 at the rate of
1.45 percent) in Medicare taxes withheld.
However, as presented later in this report, we believe that
some of the taxes withheld were not sufficiently supported
to warrant the withholding.

Deficiencies in Manually During the course of reviewing judgmentally selected


Recording Taxable Travel samples of employee long-term taxable travel vouchers, we
Transactions identified various instances where AFS/TRAS input errors
occurred due to manually entering the transactions,
including:
• Thirteen instances where the beginning travel dates
were after the ending travel dates.
• Eight instances where state taxes were not
consistently withheld, resulting in a possible under
withholding of $595.
• One instance where an incorrect tax code was
entered, resulting in an overstatement of federal
wages of $13.
• A duplicate travel payment of $3,045 that was not
identified by the system, but was subsequently
reported and repaid by the receiving employee.5
At the time of our review, the extent to which the IRS
updated its TRAS involved only the identification by the
reporting employee that taxable travel was being reported.
The process of establishing taxable income and withholding
taxes remained a manual system.
Entering incorrect information that affects an employee’s
tax obligations could possibly cause the employee to not
timely satisfy his/her tax liability. Since employees are
reimbursed through the ITRA program for taxes withheld,
the IRS could incur expenses associated with over-

5
The original TRAS voucher was received in the BFC on May 4, 2000.
A duplicate manual voucher was received in the BFC on May 15, 2000.
We did not determine the reasons for the second submission, but will
consider this issue for future audit work.
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withholding. Also, the duplicate payment of a travel
voucher, if not identified and returned by the receiving
employee, would represent an unauthorized disbursement.

Recommendation

1. The IRS CFO should consider automating the long-term


travel withholding process, including validity checks, as
much as possible, given the types of manual errors
identified during this audit.
Management’s Response: The IRS has updated the TRAS
to perform the long-term taxable travel withholding process.
The automated process includes systemic controls to ensure
the computations and amounts are correct.
The BFC was not calculating and withholding state income
No State Income Taxes
taxes associated with AFS adjusting entries to correct
Withheld on Adjusting Entries
previously recorded non-taxable travel transactions. We
identified 16 adjustment entries included in our judgmental
samples,6 totaling approximately $27,600 in taxable income,
for which no withholding was made for state income taxes.
These adjustment entries did, however, include withholding
for Federal income, FICA, and Medicare taxes.
The BFC did not withhold state taxes because the IRS’
guidelines for correcting vouchers processed as regular
travel that should have been long-term taxable travel state
that, “Travelers should be informed that there will not be
any state taxes withheld for these vouchers.” IRS staff
informed us that this practice exists because corrected travel
vouchers may involve prior tax years and the current state
tax withholding may have changed. Since withholding
amounts are calculated for other applicable taxes, we
believe this practice is inconsistent in that the same standard
should apply to all tax withholding.
Though the amounts associated with the state income tax
withholdings may not be individually significant, not

6
Seven of the entries came from our sample of 25 high dollar/volume
transactions, and 9 came from our sample of 25 low dollar/volume
transactions.
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withholding applicable state income taxes could impact an
employee’s ability to meet state income tax obligations.

Recommendation

2. The IRS CFO should reconsider its guidelines not to


withhold state income taxes associated with long-term
taxable travel adjustment entries, making them
consistent with Federal income, FICA, and Medicare tax
withholding practices.
Management’s Response: The IRS will evaluate this
recommendation and make any necessary changes to
enhance the accuracy of adjusting entries.

No Supervisory Approval for Our review of a judgmentally selected sample of 25


Adjusting Entries adjusting entries during CY 2000 showed that 10 were
processed by the BFC without supervisory approval. These
adjustment requests were received and processed based on
e-mails and memorandums received directly from the
requesting employees. The BFC, in an effort to be timely,
processed the requests without assuring that they were
approved by the traveler’s supervisor.
The Long-Term Taxable Travel guidelines require that
requests for adjustments to previously recorded travel
reimbursement transactions be sent through the employee’s
supervisor for approval.
Without supervisory approval, unsubstantiated requests for
adjustments may not be identified, especially when the
adjustment is from a taxable travel status to a non-taxable
status.

Recommendation

3. The IRS CFO should re-emphasize existing approval


procedures associated with long-term taxable travel
adjustments. Further, BFC managers should instruct
their staff to reject all requests for long-term taxable
travel adjustments that are not approved by the
employees’ supervisor.
Management’s Response: The Beckley Finance Center staff
implemented a requirement, in February 2001, to reject
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requests for long-term taxable travel adjustments that do not
reflect supervisory approval.
Office of Audit Comment: We confirmed with Beckley
Finance Center management that the implementation of this
requirement was in the form of an oral directive during a
staff meeting, and that written procedures were not prepared
to reinforce the oral directive.
Our review of a judgmentally selected sample of 25
Misclassification of Travel
employees involving 34 low dollar/low volume long-term
Vouchers
taxable travel vouchers processed during CY 2000 showed
22 vouchers that did not support a long-term taxable
situation. These vouchers included $1,531 in taxable
income, $718 in Federal taxes withheld, $55 in state income
taxes withheld, $37 in Medicare Taxes withheld, and $45 in
FICA taxes withheld. Most instances involved only one
voucher for one month’s travel, or one adjusting entry for
one to three months’ travel. Available Forms 12654 did not
indicate travel of a nature that would be defined as long-
term taxable travel. Further, some local travel, though
performed in the same area, was to different locations.
Our review of a judgmentally selected sample of 10
employees involving 145 high dollar/high volume non-long-
term taxable travel vouchers processed during CY 2000
showed 1 employee who filed 13 vouchers that appeared to
support a long-term taxable situation. These vouchers
totaled $16,753 and indicated regular mileage
reimbursement for a 13-month period.
Incorrectly classifying regular travel as long-term taxable
travel and processing the associated tax withholding causes
employees to over pay FICA and Medicare taxes. Further,
it causes the IRS to over-reimburse the employees for
Federal and state income taxes associated with the ITRA
program. Also, not classifying long-term travel accurately
violates established tax reporting requirements.

Recommendation

4. The IRS CFO should re-emphasize existing procedures


associated with the classification of long-term taxable
travel situations, to ensure that all employees and

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managers are thoroughly familiar with long-term taxable
requirements. The CFO should also consider using data
analysis techniques, similar to the tests we performed,
periodically to identify and correct potential
misclassification of travel situations.
Management’s Response: The IRS has issued policies and
procedures for long-term taxable travel and made them
available on the CFO travel and relocation website. The
CFO will issue a memorandum to all Heads of Office re-
emphasizing the policies and procedures associated with the
classification of long-term taxable travel situations, and
asking them to ensure all employees and managers are
thoroughly familiar with long-term taxable travel
requirements.

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Appendix I

Detailed Objective, Scope, and Methodology

The overall objective of this review was to determine whether the Internal Revenue Service
(IRS) had developed and implemented effective procedures and system corrections necessary to
address long-term taxable travel reporting requirements. To accomplish our objective, we:
I. Developed an understanding of the long-term taxable travel recording process and related
internal controls.
A. Interviewed key Chief Financial Officer personnel familiar with long-term taxable
travel recording to document the overall taxable travel recording operation.
B. Researched the laws and regulations associated with long-term taxable travel.
C. Obtained related correspondence, internal guidelines, web page announcements and
memos (general and targeted), which were prepared by the IRS explaining the
requirements of reporting long-term taxable travel.
D. Prepared a narrative overview of the long-term taxable travel recording operation,
including associated risk if procedures are not established or followed.
E. Identified IRS processes/controls in place to ensure compliance with long-term
taxable travel requirements.
F. Compared laws and regulations to IRS’ operation as documented in the cycle memo
to ensure consistency.
II. Determined whether IRS implementation personnel are knowledgeable of long-term
taxable travel requirements.
A. Interviewed IRS functional implementation personnel regarding their responsibilities
associated with long-term taxable travel recorded on the Travel Reimbursement
Accounting System (TRAS).
B. Compared their responses for consistency with established requirements.
III. Determined whether the TRAS was updated with long-term taxable travel requirements
on a timely basis.
A. Obtained TRAS related updates.
B. Compared those updates to what is maintained on the system, and to established
requirements.

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IV. Determined whether long-term taxable travel expenses were accurately recorded and
associated Forms W-2, Wage and Tax Statement withholding was accurately calculated.
A. Obtained an Automated Financial System (AFS) file of long-term taxable travel
recorded by IRS employees for the period January 1, 2000 to December 31, 2000.
This file also contains Form W-2 information.
B. Judgmentally selected a sample of long-term taxable travel vouchers obtained in step
A and recalculated the withholding amounts manually assigned by the IRS’ Beckley
Finance Center (BFC) for accuracy.
SAMPLE BASIS:
From the IRS-prepared database of 1,702 employees that reported long-term
taxable travel on 10,292 vouchers in calendar year 2000, we judgmentally
selected 25 employees based on a combination of a high number of vouchers filed
(most averaged 8 vouchers during the year; 9 had less than 5) and a high dollar
value (over $6,000 in the aggregate). This sample of 25 employees filed a total of
181 travel vouchers.
From this same database, we also judgmentally selected 25 employees based on a
combination of a low number of vouchers filed (no more than 3) and a low dollar
value (under $300 in the aggregate). This sample of 25 employees filed a total of
34 travel vouchers.
From this same database, we also judgmentally selected 25 employees that filed
vouchers we considered unusual due to the reported beginning travel date being
after the ending date, or the reported beginning travel date being prior to 1999.
C. Judgmentally selected a sample of Form W-2 information obtained in step A and
verified in detail the accuracy of the long-term taxable travel reported using the
employees’ travel vouchers and travel patterns (See above for sampling basis).
D. Obtained a file of long-term taxable travel adjustments entered into the AFS from
January 1, 2000 to December 31, 2000, to identify the extent to which these
adjustments were being made.
E. Judgmentally selected a sample of BFC adjustments obtained in step D and verified
the accuracy of the adjustments using the employees’ travel vouchers, travel patterns,
and any documentation to substantiate the adjustment.
SAMPLE BASIS:
From an IRS-prepared listing of 3,812 long-term taxable travel adjustments in
calendar year 2000, we randomly selected a sample of 25 adjustments.

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V. Determined whether any long-term taxable travel was performed that was not recorded
and reported in accordance with regulations.
A. Obtained a file of non-long-term taxable travel recorded by IRS employees for tax
year 2000.
B. Reviewed the file obtained in step A to identify any indicators of long-term taxable
travel, i.e. high volume of high value travel vouchers, consistent monthly claims of
mileage, etc.
C. Judgmentally selected a sample of travel vouchers by employee obtained in step A to
identify any non-compliance with reporting requirements.
SAMPLE BASIS:
From the IRS-prepared database of 52,658 employees that reported no long-term
taxable travel in calendar year 2000, we judgmentally selected 10 of 1,981 employees
based on a combination of a high number of vouchers filed (15 or more), a high dollar
value (over $5,000 in the aggregate), and the availability of records. We reviewed
145 available travel vouchers of the 181 filed by these 10 employees.

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Appendix II

Major Contributors to This Report

Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt
Organizations Programs)
John R. Wright, Director
Thomas Brunetto, Audit Manager
Richard Louden, Senior Auditor
Gary Pressley, Senior Auditor
Gwen Bryant-Hill, Auditor
Linda Douglas, Auditor
Bobbie Draudt, Auditor

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Appendix III

Report Distribution List

Commissioner N:C
Deputy Commissioner N:DC
Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O
Office of Management Controls N:CFO:F:M
Audit Liaison: Chief Financial Officer N:CFO

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Appendix IV
Management’s Response to the Draft Report

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